The Causes and Consequences of Development Clusters: State Capacity, - - PowerPoint PPT Presentation

The Causes and Consequences of Development Clusters: State Capacity, Peace and Income Tim Besley (based on joint work with Torsten Persson)

The Issues

• Why do we see this clustering between income levels, state capacities and

violence?

• A priori, it is plausible that:
• 1. income is both a cause and a consequence of violence and state capac-

ities,

• 2. violence and state capacity cause each other, and
• 3. the correlations reflect common background variables.

.2 .4 .6 .8 1 State Capacity circa 2000 .2 .4 .6 .8 1 Peace Index (1975-2006) High income in 2000 Mid income in 2000 Low income in 2000 Fitted values

Figure 1: State Capacity, Peace and Income

The Issues

• Isolating a specific unidirectional channel of causation — by a well-designed

theory or empirical strategy — can only shed partial light on the complete picture.

• To explain the clustering of good or bad outcomes, we need an approach

that ties the three dimensions of development together.

• Today, I will discuss an approach building on our recent and ongoing re-

search with Torsten Persson

• This approach emphasizes:

— the need to study common factors which shape a range of development

• utcomes,

— and to understand complementarities (positive two-way feedbacks) be- tween different performance dimensions.

The Issues

• To get at both these elements, we put the incentives to invest in state

capacity and violence

• Particularly, how these are shaped by an array of factors:

— economic — political — social conditions.

• Can cast light on debates about fragile states

— multidimensional cases of ill-being

Background

• Approaches to income differences/development
• Approaches to state capacity
• Approaches to political violence

Approaches to income differences

• Standard growth models: Solow (1956) to Aghion and Howitt (1998).

— strong focus on technology differences

• Development as misallocation: Lewis (1954) to Hseih and Klenow (2008)

— strong focus on frictions due to poorly functioning markets and insti- tutions. — provides a good way of joining micro and macro — tie back to older literature on development and institutions: Stiglitz (1988)

• Early development models focused on how government policy could pro-

mote growth and development — And this remains relevant — But is government policy always effective? ∗ much more recent focus on this issue ∗ means studying incentives in public organizations

Two Perspectives on Government Failure

• Lack of knowledge
• Lack of incentives (plus poor selection?)

Lack of Knowledge

• Perspectives on the East Asian miracle:

— Amsden (1992) and Wade (1990), suggested that more should be learned about the policy successes in “developmental states”.

• Evaluation by randomized-control-trials (RCT)

— see Banerjee and Duflo (2011) emphasize this.

Lack of Incentives

• Not fashionable in earlier development literature

— But Bauer (1972) and Krueger (1974) emphasized these issues — Bates (1981) applied the logic to post-colonial Africa

• The more recent literature on institutions can be thought of in this spirit

— Engerman and Sokoloff (2002) and Acemoglu and Robinson (2012) cast this as extractive versus inclusive states.

Our Approach

• Governments may have enough knowledge about good policies and the will

to implement them, but still lack the ability — i.e., the state capacity — to carry them out.

• Political institutions still play a key role as a driver of state-capacity in-

vestments.

Approaches to state capacity

• Many debates in development have touched upon state capacity, but it is
• nly recently that economists have focused on it.

— For example, traditional normative public finance hardly ever touch upon lacking administrative infrastructure as important constraints on the taxes that governments can raise or the public goods they can deliver.

• State capacity a focus of other social sciences:

— Historical sociology: Hintze (1906), Tilly, (1975), (1985) — Economic history: Brewer, (1989), Dincecco (2011)

• But little on complementarities with other state investments.
• Political scientists such as Herbst (2000), Levi (1988) and Migdal (1988)

have also emphasized that many developing countries too weak states and hence lack the capacity to raise revenue and govern effectively.

Our Approach

• Our approach underlines how military needs could provide a motive to build

the power to tax. — but view this as an example of common-interests

• However, what we offer is more than a formalization of old ideas.

— adopt a multi-dimensional approach with a focus on complementarities

Approaches to political violence

• Political scientists and economists have worked extensively on the causes
• f civil war.

— Progressed from mainly cross-sectional inference to panel-data studies, which exploit within-country variation ∗ see Blattman and Miguel (2009).

• A largely independent literature has explored the determinants of govern-

ment repression and violations of human rights. — see Davenport (2007)

• Strong focus on empirical regularities
• But little effort to bring theory and testing together.

• Clear pattern in the data is the strong correlation between civil war and

low income levels.

• Two leading interpretations

— Collier and Hoeffler (2004) argue that it reflects a low opportunity cost

• f fighting at low income

— Fearon and Laitin (2003) argue that it reflects low-income countries having poorer state capacity.

• But violence and income may well have common determinants.

Our Approach

• Three-dimensional development clusters embeds the analysis of political

violence in a wider setting. — Government repression and civil war as alternative outcomes, but the two have the same underlying determinants. — Allows for two-way feedbacks between income and political violence. — It probes for an "equilibrium correlation" by considering the effect of the same economic, political and social forces on the investments in state capacity and political violence ∗ and allows the political instability generated by political violence to affect the investments in state capacity.

Roadmap

• The logic of state capacity investment
• The forces that shape political violence.
• Forces behind development clusters
• Policy implications
• Topics for further research

The Logic of State Capacity Investment

• Dimensions of state capacity
• 1. Supporting markets
• 2. Augmenting markets
• 3. Raising Revenue

Figure 2: Three Dimensions of State Capacity

Collective Capacity Fiscal Capacity Legal Capacity

High Income Middle Income Low Income

Three Dimensions of State Capacity

Supporting Markets

• Conventional infrastructure
• Legal structures
• Regulation

Augmenting Markets

• Public goods
• Externalities
• Universal social protection

Raising Revenue

• Broadening the tax base
• Monitoring and compliance

Preliminaries

• Starting point: that a state exists with an established monopoly over mar-

ket support, market augmentation, and revenue collection

• Focus on: state capacity investments by a unitary state
• Standard capital investment problem, where costs today must be weighed

against benefits tomorrow by the relevant decision makers.

• BUT:

— How are choices made at a point in time in a polity with different interest groups? — How does the prospective replacement of the present decision maker affect intertemporal choice?

A normative benchmark

• Essentially an application of the Arrow and Kurz (1970).
• Some kind of social objective needs to be specified
• Gives cost benefit rules

— how far are these toutinely applied to state capacity beyond infrastruc- ture?

Complementarities

• Two-way feedbacks between state capacity and income:

— Growth process involves higher incomes as well as structural change, e.g., by extending the domain of markets. — Higher income will provide a natural boost to investments in some kinds

• f state capacity.

— Citizens may demand more intensively goods best produced by the state, creating higher returns to investing in collective capacity and fiscal capacity. — Larger prospective tax bases also mean that a given investment in fiscal capacity tax generates larger revenues.

• Feedbacks between forms of state capacity

— Fiscal capacity investment encourages moves to encourage formaliza- tion — Formalization encourages investment in fiscal capacity

• Project-by-project, cost-benefit appraisal of individual state-capacity in-

vestments could understate benefits. — critical mass effects

Natural resources and aid

• These revenues substitute for fiscal capacity, which diminishes fiscal-capacity

investments

• Resource and aid dependence may also have a direct effect on legal-capacity

building, as such income sources typically do not require the development

• f an effective market economy.

Legal Origins

• Legal origins may have a direct impact on costs for building capacity with

some kinds of underlying legal codes being more supportive of certain kinds

• f legal capacity.
• Complementarities with other state capacities would lead to spillovers into
• ther spheres of state action.

— Thus legal origins may be a second common determinant of state ca- pacity.

Collective decision making

• Cohesive Political Institutions
• Transitions of power

Cohesive political institutions

• A specific, but important, policy cleavage:

— how state revenue is split between broad-based and narrowly targeted programs.

• Executive power could be constrained by institutional forces:

— an electoral system inducing the ruling group to gain wider appeal to be (re)elected, rules for legislative decision-making inducing executives to seek broad agreements — An independent judiciary enforcing rules for minority protection. — Transparent decision-making, supported by free media

• We call political institutions that induce greater spending on common-

interest public goods “cohesive”.

• Cohesive political institutions are an important common driver of different

state capacities as they encourage all three forms of state capacity.

Common interests

• For any level of institutional cohesiveness, it will be harder to agree on

common-interest use of the state when society’s cleavages run deeper. — predicts that polities with stronger common interests invest more in the state, all else equal.

• Leading example is external threat.

Political stability

• Important feature of political systems is that a ruling group might have a

more or less secure hold on power.

• Expected political turnover reflects the political institutions in place.
• Affects how incumbent groups value state-capacity investments.
• Positive link between political stability and state-capacity investments

— stronger incentive when institutions are not cohesive.

The Bottom Line

• Typology: three types of state
• Common interest states
• Special interest states
• Weak states

• 1. Common Interest States:
• 1. — Revenue is spent for the benefit of all groups in society e.g., on

public goods, broad-based transfer programs and as defense against external threats. — Political institutions are sufficiently cohesive, with strong constraints

• n the executive, to drive outcomes close to the normative bench-

mark. — These institutions constrain the political power of incumbents, which gives them strong incentives to invest in state capacity with long- term benefits knowing that future rulers will continue to govern in the collective interest.

• 2. Special Interest States

— run to favor a ruling group which is weakly constrained by political institutions. — rule is entrenched with high political stability. — Investments in state structures primarily serve the interests of the ruling group, albeit with a possible motive to pacify its citizens. — Special-interest states can have a focus on rasing income levels, when this suits the interests of the ruling elite.

• 3. Weak States

— Few constraints on the ruling group and political instability. — Weak incentives for incumbent groups to invest in state capacity.

Collective capacity

Legal capacity Fiscal capacity

Income

per capita Common vs. redistributive interests Cohesiveness

• f political

institutions Resource (or aid) independence Political stability

Figure 4 Prevalence of civil war and repression over time and countries

The Logic of Political Violence

• Investments in violence
• These can be thought of as forward-looking and strategic.
• Simplest way to model them is as the Nash equilibrium outcome of a

simultaneous-move game, where investments affect the probability of hold- ing political power. — Outcome from fighting can be modeled by a conflict function

• Each group chooses its equilibrium investment in violence at a point in

time

— trade-off between the cost of investment against its effect on the prob- ability of holding political power times the expected benefit of holding political power.

The Bottom Line

• Three states of violence
• 1. Peace
• 2. Repression
• 3. Civil War

• 1. Peace

— Neither the government nor any opposition group chooses to invest in violence. — Benefits to capturing the state are small relative to the cost of fight- ing. ∗ Cohesive institutions encourage this.

• 2. Repression

— State chooses to use its comparative advantage in violence to estab- lish and maintain its hold on power. — Tends to occur in countries with non-cohesive political institutions, but an effective military or an opposition that is relatively fragmented

• r poorly organized.

• 3. Civil war

— More than one group, including the government, takes to violence — Organized opposition/low opportunity costs

Income

per capita Common vs. redistributive interests Cohesiveness

• f political

institutions Resource or (cash) aid independence Repression Civil war

What forces drive different forms of political violence?

Common vs. redistributive interests Cohesiveness

• f political

institutions Resource or (cash) aid independence Repression Civil war

Legal capacity

Fiscal capacity

Income

per capita

What explains the clustering of state capacity, political violence, and income?

Figure 7 The Anna Karenina Matrix

Weak Special-interest Common-interest Peace

weak common interests non-cohesive institutions high military effectiveness poorly-organized opposition strong common interests non-cohesive institutions low natural turnover strong common interests cohesive institutions

Repression

weak common interests non-cohesive institutions low military effectiveness poorly-organized opposition weak common interests non-cohesive institutions high military effectiveness poorly-organized opposition N/A

Civil war

weak common interests non-cohesive institutions low military effectiveness well-organized opposition weak common interests non-cohesive institutions high military effectiveness well-organized opposition N/A

Policy Implications

• 1. Institutional Reform
• 2. Outside policy interventions and state capacity
• 3. Outside policy interventions and political violence
• 4. Contingencies in development assistance

Institutional reform

• Approach is consistent with the maxim of "getting the institutional frame-

work right". — But distinguishes between cohesiveness and open access to power. ∗ insufficient focus on the former?? — Focuses on dynamic consequences through investments in state capac- ity ∗ complements debates about security of property rights and private investment (ES and AJR)

Outside policy interventions and state capacity

• Stronger state capacities can be viewed as a direct objective of policy.

— This has indeed become the focus of a number of initiatives regarding "capacity building" in poor economies.

• But our approach has some distinct features:

— difference between finding more effective ways of delivering public ser- vices outside the state, and doing so by changing how state structures work. — Bears on the appropriate use of knowledge created in the RCTs — With insufficient collective capacity, knowledge may not translate into effective policy — With insufficient fiscal capacity the resources to scale up programs rely

• n external funding

Outside policy interventions and political violence

• Aid in the form of generous direct budgetary support can encourage gov-

ernments to step up their repression to hang on to the prize of staying in

• ffice.
• Temptation to focus on incremental interventions which are small enough

to have little impact on the state or the political equilibrium. — But it is important to debate how much progress can be made without attention to the wider macro-picture.

Contingencies in development assistance

• Controversial topic especially when trying to support institutional change
• International assistance comes in many flavors and needs to be tailored to

the specific circumstances

• How do investments in state capacity and violence respond to different

types of assistance.

• Form of aid matters: budget support, technical assistance, military aid,

post-conflict support, or capacity building depends on the details of the current state.

Further Research/Issues

• Emergence of centralized states
• State capacity from below

— decentralized states — non-state actors

• Better measurement
• Role of norms and culture